Contractor employers have been given another reason to ensure contractors are outside IR35 following a legal ruling that certain contractors might be able to claim holiday pay.
A ruling in the case Stringer v HMRC in the House of Lords means so-called ‘permtractors’ – those who are treated more like full time employees – could be in line for large payouts.
This has huge significance for contractors working through contractor limited companies because it means companies must take IR35 seriously and confirm their contractors’ status.
“The Lord’s ruling means you can be self-employed yet still be a worker entitled to paid holiday,” said Mark Taylor of Accountax Consulting, which first reported on the case.
“The ruling means their claims are no longer limited to the current annual leave year.”
A door to “unlimited” claims is now ajar, he explained: “In the past, most firms would pay off the worker, as a year’s holiday pay – the previous maximum – cost less than an employment tribunal defence.
“However, with one past backdated holiday award, that in the Canada Life v Gray case, being in excess of £30,000, the financial impact on clients could be disastrous.”
Contractors thinking about claiming workers rights should still consider their IR35 status carefully, as HMRC would look unfavourably on contractors who claim to work outside IR35 then try to get holiday pay.
A very narrow band of contractors would actually be eligible for long-term holiday pay, because they would have to be directly hired by the client as a sole trader, or working through the agency PAYE payroll as an agency worker.
“There are three key tests of being a worker, and these should be distinguished from the tests of employment,” said Taylor. “Firstly, there has to be a contract in place. Secondly, the worker is personally required to work, and cannot supply a substitute. And thirdly, the worker cannot be in business, because if they are then they cannot be a worker.”
Limited company contractors immediately fail the test, because not only are they in business but there is also an intermediary – their company – between them and the client.
Umbrella company contractors should already have an employment contract with their umbrella company and are also unlikely to be able to benefit from this ruling.
Though some umbrella contractors might have claims for backdated holiday over many years against their umbrella company, if they have not received the proper payments.
According to Taylor, the ruling ultimately affects clients with large subcontracted and self-employed workforces. “We see the biggest impact will be on construction clients. But any end-user client hiring large numbers of sub-contractors should be reviewing their contracts already in place and any new contracts as a matter of urgency.”
Momentum seems to have shifted in favour of limited company contractors working outside IR35, whose clients could be an invaluable ally when it comes to putting together evidence that contractors are not ‘employees in disguise’.
